When it comes to investing, putting money into stocks is one of the best options for the long term. However, as you can imagine, trading in the market can be complicated and somewhat confusing for first-timers. Fortunately, there are tons of resources on the subject, so getting started is all about doing a bit of research.
We’ve compiled a list of five great value investing books worth a read. Whether you’re brand new to the world of stocks and investing or just want to polish your knowledge, each of these books is going to help.
Written By: Benjamin Graham
As a rule, the stock market is inherently risky. However, by analyzing businesses and doing some research before pouring money into the market, you can hedge your bets and reduce your risk.
Benjamin Graham was the pioneer of “safe investing” and the father of modern stock investing. In fact, he was the mentor of world-famous investor Warren Buffet, who calls this book “the best book about investing ever written.”
Since it was published in 1949, parts of the book are a little outdated, particularly because Graham focused on stocks and businesses of the day. Fortunately, it’s been updated and revised over the years, so you can buy a more modern version if you want. Regardless, the advice and insight into investing provided by the book are helpful no matter which version you read.
The Intelligent Investor offers mathematical processes for evaluating businesses and putting money into stocks. Graham refers to the market as “Mr. Market,” and suggests that you treat it as you would a business partner. Every day, Mr. Market has a new offer for you, and you can decide to take it or leave it.
One of the most significant problems with investing is that so many people let emotions dictate their actions. As a result, the market can fluctuate wildly.
Graham focuses instead on the mathematics of investing to remove as much emotional influence as possible. So, when reading this book, you’ll learn how to evaluate businesses from a strictly financial aspect, as well as determine when to buy and sell individual stocks.
Typically speaking, Graham tried to buy stocks at less value than the company was worth, then sell once it reached its “fair value.” To put it into more accessible terms, he would want to buy one dollar worth of stocks at $0.50, then sell once it reached its actual value.
Overall, Graham was a long-term trader. Also, because of his methods, he was able to remove a lot of the risk involved and come away with a remarkable return on his money.
If you’re serious about investing, this is a must-read. While you may decide to experiment with both long and short-term investing, the methods and practices included in The Intelligent Investor will provide a valuable framework. Learn how to evaluate businesses and minimize your risk, as well as use math and logic to make decisions, rather than emotion. Overall, this is by far one of the best value investing books and should serve as the introduction and foundation for investing in stocks.
Written By: Burton Malkiel
The history of the stock market is littered with booms and busts. Since its inception, people have always tried to overvalue products and markets, often with disastrous results. Back in the 1800s, it was railroads. Before the Great Depression, it was property. In the 90s, it was dot-com businesses.
Each time it happened, the mechanics of the boom worked in roughly the same way. Investors bought into a market without understanding it fully, they overinflated its value (which led to more people investing), and eventually, everything went bust. In each case, the value of the product or industry leveled off within a few years after the crash.
The purpose of showcasing these examples is to illustrate how the market always corrects itself. So, as an investor, you need to anticipate these fluctuations and buy and sell accordingly. If a market is rising fast, there will inevitably be a crash, so you need to plan for it.
Another primary element of this book is comparing technical analysis to fundamental analysis. The former relates to numbers and correlations based on past data.
While it can give the illusion of safety, it’s too easy to buy into numbers that may or may not mean anything. Instead, fundamental analysis is similar to Graham’s work - evaluate a business as a whole to determine its long-term potential.
A Random Walk Down Wall Street covers a lot of territory within the larger world of investing. Realistically, you should come away with a better understanding of how the market works overall.
Malkiel highlights the fact that trying to find inefficiencies or exploit the market seldom works, so don’t try to reinvent the wheel. Instead, research and analyze based on actual information and recognize the fact that the future is impossible to predict.
Investors who want to understand the stock market inside and out will find this great value investing book quite useful. It offers some excellent insight into the factors that can influence prices and stocks so that you can make more informed decisions.
Written By: Warren Buffett
As you probably know, Warren Buffett is one of the most successful stock investors in history. He’s made billions by putting his money in the right stocks, and he learned at the feet of Benjamin Graham. The Essays of Warren Buffet is basically a highlight reel of Buffett’s strategies and ideas about investing, so it’s already pretty valuable.
Because these are essays about the stock market, this great value investing book doesn’t exactly have an overarching message or throughline. Instead, Buffett discusses various elements of investing, including junk bonds, index funds, and modern portfolio theory. You can get a lot of insight into how Buffett chooses stocks so that you can potentially make similar moves.
There are three fundamentals of stock investing, according to Buffett. First, treat the market as a business partner (a la Mr. Market from Graham’s book). Second, learn the Margin of Safety rule. This rule stipulates that you should invest in a stock when the price is lower than the actual value of the company.
Finally, he discussed the circle of competence. This rule illustrates the idea that you should understand a business before investing in it. If you don’t know what it does, how it works, or you don’t understand its finances, don’t put money down (cryptocurrencies, anyone?).
Beyond the three rules covered above, this great value investing book is an excellent way to see how the master invests in stocks. As with “A Random Walk Down Wall Street”, Buffett says that you shouldn’t trust the “experts” just because they seem to know a lot. Investing isn’t really that complicated - it’s just time-consuming.
One critical takeaway is that you can be the master of your portfolio. While index funds and diverse stocks can reduce risk, there’s nothing wrong with putting more eggs into a single basket. Just make sure that you’re paying attention, and don’t let emotion dictate your actions (notice a theme?).
If you like the idea of taking charge of your investment portfolio, this book is a must-read. If you’re okay with letting an investment firm manage your stocks, then it will help you understand what they’re doing at least.
Written By: Benjamin Graham and David Dodd
Although the Intelligent Investor was a more well-defined treatise on the methods of Benjamin Graham, Security Analysis was the foundation. His original book on the inner workings of the stock market is treated as a pseudo-bible among many modern investors.
The book itself is both lengthy and a bit heady at times. Casual investors may not want to bother, although the first few chapters can offer some real, tangible value. At the beginning of the book, Graham and Dodd outline the objective of security analysis, as well as define the two primary types of investors.
Concerning security analysis, the purpose of it is to look at the facts around a particular stock (or security) and draw conclusions from those facts. Speculation is antithetical to smart investing, as it relies on hopes and dreams, not cold, hard data. Realistically, investors will make informed decisions, while dreamers will put money down without a guarantee. It’s similar to comparing true investing to gambling.
As far as investors go, Graham and Dodd say that they can be either defensive or enterprising. Defensive investors believe in reducing risk as much as possible (i.e., by diversifying their portfolio). Enterprising investors use the tools and knowledge of the market to find businesses with a high intrinsic value.
As illustrated in Buffett’s essays, the Margin of Safety is when the price of a stock is lower than the company’s value. Enterprising investors take advantage of this gap to minimize risk.
There is a lot more to this book though, so plan on taking a deep dive into the world of stocks and investing. Again, it’s a lengthy read, but worth it if you want to understand the market as much as possible.
Realistically, you’ll come away from this book with a deeper appreciation of what it takes to be a professional investor. You should determine whether you’re a defensive or aggressive (enterprising) investor and then start acting accordingly.
Another takeaway will be how to evaluate a company, particularly when measuring the Margin of Safety. One interesting point of the book is how investors were before and after World War 1.
Before the war, they treated each stock as if they were buying the whole company. After the war, it became all about speculation and trends, which is partly what led to the stock market crash of 1929. As you can imagine, Graham and Dodd highly recommend a “pre-war” attitude toward investment.
If you’re an investor looking to expand on the Margin of Safety and how to evaluate stocks by yourself, this book is highly valuable. Casual investors will probably be turned off by the massive number of pages and heady writing style.
Written By: Philip A. Fisher
With investors like Graham and Buffett, the key to success is to focus on businesses and stocks that show reliability and stability, even in the face of market fluctuation. While this practice can lead to low risk and high reward, it has relatively limited potential. Overall, it’s the “safe” bet.
With Common Stocks and Uncommon Profits and Other Writings by Philip Fisher, however, he focuses on the growth potential of a business as the primary metric for investors. Rather than looking at established companies with a long history, he argues that investors should get in on the ground floor of a business with a lot of potential.
Simply put, Fisher argues that as long as you can find that one company with a meteoric rise, you can come out wealthy at the other end. Imagine if you had invested in Google or Facebook back in the day - you’d be utilizing Fisher’s methodology.
That being said, because startups and newer companies don’t have a lot of stability or an extensive track record, there is more risk involved. You can mitigate this risk, though, by focusing on the industry in which the business exists (and it’s growth potential), as well as the management of an individual company.
Overall, as long as competent people are running the business, and the industry shows a lot of promise, you can hedge your bets and come out a winner. As you might imagine, this technique leaves a lot of room for error, and you still want to diversify among different companies to account for unforeseen setbacks.
The idea of investing in a potentially massive startup sounds appealing to many investors. As we mentioned, what if you had put money into one of the current tech giants? How many millions would you have today?
One critical takeaway is Fisher’s “15 points to evaluating a stock.” While it’s not a foolproof system, it can help you understand a particular company without having to rely on gut instincts.
While Fisher made it work for him, not everyone has the industry contacts or insight that he does. Even Warren Buffett says that he’s roughly 15 percent Fisher (and 85 percent Graham).
So, if you like the idea of getting in on the ground floor of the “next big thing,” this great value investing book can help you get there. However, don’t ignore the Margin of Safety, and definitely don’t put all of your money into a new business.
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NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
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